Healthcare Reform Pushes Need to Merge, Acquire or Partner

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While healthcare
reform and the transition to delivering value-based care are pushing merger,
acquisition and partnership (MAP) activity to ever-higher levels in the U.S., a
survey suggests that a number of reasons are driving this growing phenomenon as
healthcare leaders continue to look beyond their own organisations to survive
and thrive.

According to the
2016 HealthLeaders MediaMergers, Acquisitions and Partnerships Survey,
the top financial objective for MAP activity is to increase market share (70
per cent), followed by improving financial stability (60 per cent), improving
operational cost efficiencies (58 per cent), improving position for payer
negotiations (57 per cent), and expanding geographic coverage (57 per cent).

Likewise, the
top five care delivery objectives follow a similar pattern: to improve position
for population health management (70 per cent), followed by care delivery
efficiencies (63 per cent), clinical integration (61 per cent), care delivery
cost efficiencies through scale (54 per cent), and expanding into new care
delivery areas (51 per cent).

According to
Greg Devine, former senior vice president of provider strategies at ThedaCare,
a Wisconsin–based nonprofit health system, and current president and CEO at
AboutHealth, a Wisconsin-based clinically integrated network, the high level of
MAP activity involving physician practices indicates the key role that primary
care physicians play in the continuum of care, making them attractive
acquisition targets. As a result, providers in some areas of the country are
facing tight supplies of physicians.

“Particularly at
the primary care level, I think it’s not for the sake of ownership or control
that’s driving this. It’s really is being driven by the need to align the
various elements of the continuum of care around delivering better outcomes and
waste elimination,” he said.

Without question,
survey respondents are bullish on the prospects for higher levels of MAP
activity. Seventy-five percent of respondents say they will either be exploring
potential deals or completing deals that are underway in the next 12–18 months,
and only one in four respondents (25 per cent) say they have no MAP plans,
according to Jonathan
Bees, senior research analyst at HealthLeaders Media.

Further, nearly
two-thirds of respondents (63 per cent) said that their organisation’s MAP
activity will increase within the next three years, and only three per cent say
it will decrease. Thirty-three percent said it will stay the same.

Another
barometer of MAP activity is the total dollar value of the mergers and acquisitions
that respondents said their organisations will be exploring over the next three
years. While this year’s survey results are comparable to last year’s, there is
a small shift to a higher total dollar spend on mergers and acquisitions
(M&As). The $50–99.9 mln range is up three percentage points to 17 per cent,
and $100–499.9 mln is up five points to 21 per cent compared with last year,
while the lower $10-49.9 mln range is down nine points to 23 per cent, added
analyst Bees.

Interestingly,
respondents indicate that it is not only total MAP spend that is increasing,
but also the size of the deals being pursued. Nearly half of respondents (49
per cent) said that they expect the dollar value of the M&As their organisation
will be pursuing within the next three years will increase, and only five per
cent said the value will go down. Sixteen percent said it will remain even.

Impact of the Affordable Care Act

As mentioned
earlier, the reasons behind the high rate of MAP activity range from
traditional considerations such as the need for increased market share,
improved scale, and increased financial stability, which are more tactical in
nature, to more strategic and far-reaching factors such as anticipating the
impact of the Affordable Care Act and the transition to value-based care.

“The Affordable
Care Act is certainly driving some of it,” said Paul Tait, chief strategic
planning officer for University Hospitals, a Cleveland-based non-profit health
system. “But there’s usually a financial reason, which is the catalyst, and
there’s a couple of different elements to that. One is that there’s a lot more
capital availability for acquisitions these days—and with lower interest
rates—so if you’re a larger, well-established health system, then you probably
can borrow money at a reasonable rate.

“On the other
side of it, I think with a lot of the hospitals that are linking up, it’s
because they need access to capital or they need new investment. And in some
cases, they’re just running out of money. There’s an awful lot of financial
margin pressure on hospitals, and I think that’s just going to get worse
because of the payment changes that have already started and will accelerate.”

Tait points out
that increasing scale is a key driver of increased MAP activity because of the
range of its many benefits, such as greater purchasing scale with vendors.

Looking to the
future, respondents were also asked to identify the organisations that they had
a high interest in pursuing through a MAP deal within the next year. The top
five responses were: physician practices (61 per cent), health systems (41 per
cent), hospitals (39 per cent), physician organisations (34 per cent), and
retail clinics/urgent care clinics (26 per cent).

“We’ve seen a
number of community hospitals that have been unsuccessful replenishing their
medical staff as people leave or as people retire. In some cases, they may have
lost physicians to competitors in their local market, and if they try to employ
some doctors, they don’t have the scale to do it well. It’s very common for us
to see a single community hospital that might be trying to employ anywhere from
15 to 30 doctors, and they’re losing over $200,000 per doctor,” said Tait.

As regards the hurdles
that have the potential to derail the MAP initiative, concern about the
assumption of liabilities (29 per cent) was the top financial reason for the
second year in a row.

The extent of a
target organisation’s financial liabilities may not be apparent until the due
diligence phase is completed, which may explain why this can be a deal-breaker,
concluded research analyst Bees.

Concern about
risk/revenue sharing (23 per cent), price (22 per cent) and regulatory issues
(20 per cent) rounded out the top four responses.

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